5 Examples of Citizenship-Based Taxation and Worldwide Income for U.S. Persons (Golding & Golding)

Citizenship-Based Taxation
The United States is one of the only countries across the globe that follows a citizenship-based taxation model instead of a residence-based taxation model. That means that the United States taxes individuals based on what their U.S. person status is for tax purposes and not necessarily where they reside or where the income is sourced from. One important thing to keep in mind is that citizenship-based taxation is not limited to just citizens, rather it includes:
-U.S. Citizens
-Lawful Permanent Residents
-Foreign Nationals who meet the Substantial Presence Test
If a taxpayer falls into one of these three categories above, they are typically required to pay U.S. taxes on their worldwide income along with reporting their foreign assets, accounts, and investments on various international information reporting forms. This is extremely unfair, especially for taxpayers who may only be residing in the United States temporarily but are still held to the same reporting standard as a U.S. citizen who may have been born a U.S. citizen and more familiar with the U.S. tax system. It is not as if the U.S. government provides new U.S. persons with instructions about what to report and how to report it properly.
Adding insult to injury is the fact that many taxpayers who are out of compliance end up getting penalized significantly by the IRS for failing to file the proper forms. Noting, that the IRS does offer various amnesty programs for taxpayers who qualify so that they may be able to avoid the fines and penalties, but some taxpayers only learn about these programs after they have been assessed penalties by the IRS - which it is too late to submit to programs such as the Streamlined Procedures. Let’s walk through the basics of the citizenship-based taxation system along with some examples and tips.